Analysis and design of systems utilizing blockchain technology to accelerate the humanitarian actions in the event of natural disasters

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Analysis and Design of Systems Utilizing Blockchain Technology to

Accelerate the Humanitarian Actions in the Event of Natural

Disasters

by

Suresh G. Rajan

M.B.A., Lake Forest Graduate School of Business, 2010

B.E. Computer Science and Information Systems University of Madras, 1994 Submitted to the System Design and Management Program in Partial Fulfillment of

the Requirements for the Degree of

Master of Science in Engineering and Management

at the

MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2018

The author herby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any

medium now or known hereafte cryated.

Signature of Author:

______Signature red acted

Department of/Sstem Design and Management May 11th, 2018

Signature redacted

Certified by:

Simon Johnson Ronald A. Ku tz 954) Professor of Entrepreneurship

MIT Sloan School of Management

Thesis Supervisor

Signature redacted

Accepted by:

MASSACHUSETTS INSTITUTE Joan S. Rubin

OF TECHNOLOGY Executive Director, System esign & Management Program

JUN 2

02018

LIBRARIES

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Suresh G. Rajan 2

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Analysis and Design of Systems Utilizing Blockchain Technology to

Accelerate the Humanitarian Actions in the Event of Natural Disasters

by

Suresh G. Rajan

Submitted to the Department of System Design and Management on May 11, 2018 in Partial Fulfillment of the Requirements for the Degree of Master of Science in

Engineering and Management

ABSTRACT

This paper focuses on designing novel ways to alleviate human and economic impacts caused by weather and climate disasters such as droughts and cyclones. Natural disasters are becoming apparent and continue to grow in number, intensity, and impact. Authorities, organizations and community groups who focus on

rebuilding and relief efforts are constantly facing challenges in redevelopment effort, environmental hazards, health care and funding support to help communities become recover and be more resilient. When dealing with aftermath due to natural disaster the communities do have heightened sense awareness and come together to provide the necessities of rebuilding infrastructure.

There are short-term actions, such as an evacuation based on the weather

forecasting. Can a system that properly communicates with all affected stakeholders to be prepared for the natural disaster. The implemented system takes the

appropriate actions thereby by reducing the human and economic impacts. This precious window of opportunity time between the forecast and actual natural disasters is regularly overlooked which affects the recovery and resilience process. This thesis explains how to design a holistic system that can lessen the risk of natural disaster with a system for forecasting, automatic trigger responses and disburse required funding when certain threshold conditions are met prior to natural disasters. The proposed framework takes into consideration of blockchain technologies that are at the relatively early stage of development. The objectives are to develop novel early funding mechanism and explained using conceptual

architecture with private blockchain and smart contracts that can be designed to automatically execute early funding mechanism when the natural hazard thresholds are reached.

Thesis Supervisor: Simon Johnson

Title: Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT Sloan School of Management

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ACKNOWLEDGEMENTS

I would like to thank my thesis advisor, Professor Simon Johnson for his role as my advisor.

His lectures and guest speaker series had helped me to assimilate concepts and understand business model to broadened my knowledge and viewpoints of using blockchain technology.

I am also grateful to Executive Director Joan S Rubin, and the entire SDM staff for making

my SDM experience so valuable, rewarding and memorable.

I'd like to my thank my collaborator Bridgit Mendler who had inspired me to think beyond

the conventional perspectives. I am grateful Dr. Pablo Suarez, Associate Director for Research and Innovation, Red Cross Red Crescent Climate Centre, who supported me throughout my thesis journey. He connected me with many mentors to help investigate the challenge and conduct my analysis and research.

I would like to thank my MIT friends, who have been like family to me during my 16

months journey. I am grateful for their guidance, and encouragement and I feel lucky to have chance working with them.

I would like to thank my friend and mentor Ali Khan who was the one who encouraged me

to pursue MIT SDM degree and I have truly found paradise.

My special thanks to my dear wife Kanchana and my daughter Adhya, simply accepting

that fact that I am always buried in my books and meetings. I could not have done this without their constant support and encouragement to pursue my Master's degree at MIT.

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Suresh G. Rajan

MIT System Design and Management Thesis

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List of Figures

Figure 1: NOAA Climate.gov, based on NCEI data... 14

Figure 2: Humanitarian Programme Cycle ... 17

Figure 3 Forecast-Based Financing -An innovative approach ... 21

Figure 4: Criteria for identification and design of Forecast-based Financing in terv en tio n s ... _{2 2} Figure 5: Illustration of possible outcomes of forecast-based action ... 24

Figure 6: Early Action Protocol and FbF Stakeholders Interactions ... 26

Figure 7: Blockchain Process Flow ... ₂₉

Figure 8: Timeline view of Forecast-Based Financing ... 45

Figure 9: Forecast-Based Financing Blockchain Component... 51

Figure 10: Forecast-Based Financing Blockchain with Reporting Platform... 52

Figure 11: Weather Data Collection DApps... ₅₃

Figure 12: Decentralized Machine Learning Platform... 54

Suresh G. Rajan

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List of Acronyms

OCHA _{The United Nations Office for the Coordination of}

Humanitarian Affairs

GRPS Global Risks Perception Survey

U.S. The United States of America

DHS _{U.S. Department of Homeland security}

FEMA _{Federal Emergency Management Agency}

NCEI _{U.S., National Centers for Environmental Information}

ERP Emergency Response Preparedness

IASC Inter-Agency Standing Committee

DRR Disaster Risk Reduction

EWS Early Warning Systems

SDG Sustainable Development Goals

IFRC _{International Federation of Red Cross and Red Crescent} Societies

FbF Forecast-based Financing

EAP Early Action Protocols

PKI Public Key Encryption

DApps Decentralized Applications

DAO Decentralized Autonomous Organizations

PoW Proof-of-Work

PoS Proof-of-Stake

UTXO Unspent Transaction Output

DML Decentralized Machine Learning

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1. Introduction

"The ability to self-organize is the strongest form of resilience. A system that can evolve

can survive almost any change, by changing itself (Meadows) ." - Donella Meadows,

Thinking in Systems (2008)

"Humanitarian action provides life-saving services and facilitates the return to normalcy for people and communities affected by natural and man-made disasters ("Good Practice Review")." Traditional, response-driven humanitarian funding mechanisms such as grants are not keeping pace with recurring crises driven by natural disasters. An estimated 128.6 million people were affected by disasters both natural and man-made confirmed by The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) (Global Humanitarian Assistance).

The humanitarian system includes United Nations entities, the International Red Cross/Red Crescent Movement, non-governmental organizations, government institutions and donor agencies. They are all united in adherence to the principles of humanity, neutrality, impartiality, and independence ("OCHA Humanitarian

Assistance for People in Need"). These are meant to ensure that assistance is provided on the basis of the need by humanitarian actions.

The frequency and impacts caused by natural disasters that are impacting communities require immediate attention and interventions. In my thesis, I will explore solutions to mediate natural disasters and I would start my research with the following questions - What are the barriers to lessen impacts caused by natural disasters? What are inefficiencies in the system for enablers to save lives and reduce sufferings.

1.1 Outline

In this thesis, the first chapter covers background and motivation. This paper is organized as follows.

Chapter 1: Introduction chapter covers the challenges in humanitarian funding with increasing frequency and impact caused by natural disasters as well as the outline of this thesis.

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Chapter 2: Overview chapter covers my motivation of this thesis and analysis on cost implication of natural disasters around the world.

Chapter 3: Overview on Humanitarian organization and its challenges with humanitarian actors and logistics. Current state analysis of humanitarian disaster response and need for early warning system. Detailed analysis of Forecast-based financing, novel method to get funding for early response; covering stakeholders' roles and responsibility on how to trigger early funding based on the threshold levels of natural disasters.

Chapter 4: Overview of blockchain technology covering the design principles and explore blockchain technology and challenges involved.

Chapter 5: Overview of smart contract design principle. Introduced new and evolving decentralized application platform and limitations of smart contract and decentralized application platform.

Chapter 6: Design criteria using blockchain in Forecast-based financing including breakdown of workflow, timeline and working of funding mechanism and proposed using permissioned blockchain and smart contracts for Forecast-based financing.

Chapter 7: Conceptual Architecture for proposed Forecast-based financing using Private Blockchain and next steps and recommendation

Chapter 8: Conclusion and Future Research

The information in this thesis is from three types of sources: literature review, interviews with professors, subject matter experts and my own analysis.

2. Overview

Natural Disasters can be broadly classified into meteorological, hydrological, climatological, geophysical, biological, extraterrestrial(EM-DAT). Tropical storm, flood, drought, wildfire, earthquake and volcanic activity are few subtypes of the natural disaster classification are causing direct and indirect economic impact, and societal impact all around the world. There is profound demand to save humanity

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and provide necessary essentials when this natural disaster triggers food and water crisis. This chapter will focus on motivation for my thesis, risk and challenges of weather and climate disaster, and challenges faced by non-governmental

organizations, government institutions and donor agencies to respond and recover from natural disasters.

2.1 Motivation

I spend last decade building software applications for the large organization. As a

software architect, I prefer investigating the socio-technical systems through the path of reconciling system conceptualizations, and stakeholder values. In this paper,

I will approach to decompose the physical or functional into distinct components

that interact in direct ways. Over the decade, I have been exposed to the dramatic technological transformation that disrupting how the information is processed and disseminated. Knowledge gained from this information is disrupting on the

traditional job and organizations. The complexity of decision-making and its consequence are important in designing the system and defining the system boundary. My approach is to understand the requirements, identify stakeholders' needs, develop conceptual architecture, and make design recommendations to address the identifies gaps in the existing systems.

I started this thesis from an idea originated in the class Entrepreneurship without

Borders. This class format and structure gave the opportunity to learn and explore the future of blockchain and its implications in the way how business, government, organizations, and individuals work together. I was captivated by the technology and concept on how blockchain can provide simpler and secure way to establish a trust for movement of money, assets and secured information to anyone in peer-to-peer without any intermediators. In addition, guest lecture by Dr. Pablo Suarez, Associate Director for Research and Innovation at the Red Cross Red Crescent

Climate Centre, who conducted a participatory activity to bring awareness and understanding that intervention system is required to face the challenges and impacts caused by weather and climate disasters. As the blockchain technology is applied in various ways within various sectors including banking and financial

Suresh G. Rajan ₁₂

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services, I was motivated to look whether blockchain can be sought in humanitarian actions to enhance and improve efficiency in financing aspects as well as tackle the challenges to alleviate losses due to natural disasters effectively.

2.2 _{Weather and Climate Disaster}

In order to understand the cost implication due to weather and climate disaster, I started my analysis with exploration of natural disaster in last 5 years. I have summarized my findings focused on increasing cost and impacts.

Global Risks Perception Survey (GRPS) 2017-2018 conducted by World Economic Forum, Extreme weather events ranked number one and two in likelihood and impact of top 10 global risks (World Economic Forum). The survey participants, from various continents and network of business, government, civil society and thought leaders, do predict that these global risks likely to cause significant impacts in next 10 years. Extreme weather and climate disaster is the most pressing

environmental challenge among the others such as major natural disasters, man-made disasters, and biodiversity loss, etc. and continues to remain on top five global risks in the last five years.

The GPRS can be qualitative and could be influenced by perception and viewpoints.

I explored in what was The United States of America (U.S.) spent on weather and

climate disasters for 2017. In 2017, Atlantic hurricanes-Harvey, Irma, and Maria-was the most intense to make landfall in rapid succession and the cumulative cost of

$306.2 billion was the most expensive hurricane season ever (Smith, "2017 U.S.

Billion-Dollar Weather and Climate Disasters: A Historic Year in Context

I

NOAA

Climate.Gov"). The same year, U.S. was impacted by 219 weather and climate disaster that includes storms, inland floods, drought and wildfire and cost exceed

$1.5 trillion (Smith, "Billion Dollar Disasters 2017").

These extreme weather events continue a trend towards increasingly cost, and a number of events have caused the most deaths in the 2017 and displaced 31million people (Smith and Katz).

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Wiolo.lar .aters by tpe, fom 1980-2017 NOAA Climate time series

Is 4W0

*s lit 2 graph based on NCEI data

14

:

willustrate the different type of

8 Severe storfm

12 - ~ weather and climate

10 rdisasters in the U.S. over the

I

Z

period from

1980

to 2017, 4 and the number of events and

2 cost shows is steadily

1,.0 1 ,,5 265 2 2M7 increasing over the time

period(Smith and Matthews).

Figure 1: NOAA Climate.gov, based on NCEI data

The cost is accounted from the estimates which include physical damage to residential, commercial and

government/municipal buildings, material assets within a building, vehicles, public and private infrastructure, and agricultural assets (Smith and Katz). However, I found that the cost assessment does not take losses into consideration of natural assets, healthcare related losses, or values associated with loss of life. I understand this information contains sensitive personal information (SPI) and so cost wasn't accounted but it is the missing data is important data to support the consequence particularly under conditions of increasing vulnerability and uncertainty related to weather and climate disasters.

In U.S. Department of Homeland security (DHS) provides disaster assistance to the property damages that are not covered by insurance. DHS in support of the Federal Emergency Management Agency (FEMA) provides disaster response, and recovery which are assisting states and communities after weather and climate disaster.

FEMA directs their resources on four phases of emergency management focus on

the prevention, mitigation, response, and recovery (Branosky). Currently the majority of assistances are focused on after weather and climate disasters for response and recovery phases. The first two phases prevention and mitigation require attention and there is need to shift focus to reduce the cost as well as life impacts in the natural disasters prone areas. The prevention and mitigation can help

Suresh G. Rajan

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to understand and prepare with the information known about the infrastructures that are built in an area vulnerable to disasters - along coastlines or in areas

vulnerable to wildfire. Policy advocates stress to prioritize focus on prevention and mitigation when dealing with terrorism. There is need to shift focus on changing the policies to include prevention and mitigation to better prepare for future weather and climate disasters.

According to 2017 Annual Report Economic cost of Atlantic hurricanes-Harvey, Irma, and Maria were $220 billion and the insured cost was $80 billion (Benfield). In

U.S., National Centers for Environmental Information (NCEI) monitors and assess

the cost of impacts of disasters (Smith, "Billion Dollar Disasters 2017"). To calculate the cost assessments, NCEI used various data sources to perform analysis and found that the increase in cost for uninsured and underinsured losses. Yet another

research paper (Smith and Matthews) confirms that cost of damages is increasing in the regions that are vulnerable to hurricanes and insurance companies are not able to cover the gaps in insurance claims from the infrastructure damages. So, the government agencies are stepping in to cover the gaps in the insurance coverage. These findings show that the frequency of natural disasters is increasing and the unaccounted cost that covered by the government agencies will have damaging economic effect in the long run.

Developing countries and smaller economies even suffer more greatly from the natural disasters' impacts and communities are susceptible to suffer from the lack of insurance and government aid support. This claim seems to be true from the study conducted on the challenges faced by the people displaced by Typhoon Haiyan in the Philippines (Baudot). Four million people were homeless and disaster recovery program forced communities to relocate away from the coast whose livelihood depends on the fishing industry. In addition, the country faced with challenges such as extended loss of electricity, water, and inability to access necessary

infrastructures such as roads and bridges.

Another study paper (Guha-Sapir et al.) showed that the developing countries that were affected by natural disaster total number of people affected by disasters were

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569.4 million. The same year, the U.S., along with China, India, Indonesia and the Philippines are among the most frequently hit by natural disasters. There is a significant number of people affected by the natural disasters are from countries that are heavily populated. In India, 330 million people, the highest number of people, affected by the drought. Three natural disasters killed more than 500 people in the countries Ecuador, Haiti and Korea (Guha-Sapir et al.). The direct and indirect economic impact of natural disasters caused by the damages to the infrastructure such as housing and agriculture and the livelihood such as loss of revenues, unemployment and displacement requires attention from international

humanitarian assistance. In my analysis, I found that natural disasters caused by the weather and climate are increasing causing huge economic losses as well as life losses. In the next chapter, I will focus on Humanitarian organization, challenges and opportunities.

3. Humanitarian Organization

Humanitarian organization is required go through the complex process to respond to any natural disasters. Majority of activities for natural disaster response

operations will require the humanitarian organization to customize the level of preparedness and planning depending on nature and speed at which a natural disaster occurred. The Humanitarian logistical challenges are always complex and daunting; humanitarian actors on the ground need to make difficult decisions, often under time and resource constraints. So, it is important for the actors to be

knowledgeable about the principles that are the foundation of humanitarian work and can be an invaluable tool in responding to the natural disasters. OCHA brings together humanitarian organization using cluster method for coordination within various levels of information management for assessing situations and needs, monitoring progress, and mobilizing funds ("OCHA Humanitarian Assistance for

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NEEDSASSESSMENT People in Need"). The OCHA's & ANALYSIS

objective is to ensure that the humanitarian actors are

OPERATIONAL PEER

STRATEGIC prepared, plan, execute, REVIEW& EVALUATION ~'EYPLANNING

empower, monitor and exit

according as shown in figure

IMPLEMENTATION _RESOURCE

9 MONITORING MOBILIZATION 2("HPC Graphic 2014

(721x466)").

Figure 2: Humanitarian Programme Cycle _{Emergency Response}

Preparedness (ERP) is a proactive approach to the emergency has three elements

-Risk Analysis, Monitoring, Minimum Preparedness Actions, and Advanced

Preparedness Actions and Contingency Planning ("The Humanitarian Programme Cycle"). ERP jointly developed for risk analysis, contingency planning, and

integration of emergency planning and humanitarian actors are required to spend extensive effort in understanding government players primarily responsible for providing humanitarian assistance. ERP process is slower for the tasks performed to complete risk analysis and other elements required for natural disasters. The

humanitarian organization not only spend extensive time but also require to invest in a team with individual expertise in areas specialized in food, water, and medical needs.

3.1 _{Analysis of Humanitarian Disaster Response}

IASC humanitarian programme cycle step by step logical building blocks to ensure

the response is delivered in need to people affected by disaster ("The Humanitarian Programme Cycle"). Each element within the cycle face challenges with assessment, planning operations, coordination with other organizations and reporting.

When the natural disaster, such as hurricane, earthquake, or humanitarian

emergency, the humanitarian organization work together to quickly and accurately assess the needs and determine the required supplies using the local expertise. However, the assessment tends to vary a lot that is based on rough projections or using the historical data from previous weather and climate disaster. Humanitarian

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actors also challenged working the affected area when the physical infrastructure such as road, bridges and airports are not functional and transportation is extremely limited. Inter-Agency Standing Committee (IASC) that needs assessment and

analysis must consult with local governments which may be severely impacted and may not be willing to provide an actual and accurate assessment to disseminate information that is required for preparing a response plan.

According to Financial Tracking Service website that tracks humanitarian aid flow for each country reported $11.4 billion unmet requirements with 48% not funded for 2017("Global Humanitarian Overview 2018"). Low levels of funding are affecting assistance in many areas including the where communities are displaced. The report "Global Humanitarian Overview 2018" findings show that in Aug 2017 only half of the children treated for malnutrition. The report illustrates with few communities thrived when sufficiently funded and when the humanitarian assistance was able effectively to deliver results. Natural disaster causalities such as human suffering when covered in the news and media get immediate attention from the other countries in stepping up and mobilizing the funds.

One of the challenges in a delay in funding or under funding will affect the mobilization of supplies to the disaster area. First all participating humanitarian organizations need to complete assessments then using the assessment report to request raise funds that be appropriated to the disaster relief needs. While the credibility and accuracy of the needs do have influence in donor decision making process but the securing funding after assessment will slow the disaster

relief("Characterising a Slow-Onset or Protracted Humanitarian Situation Clarifying the Scope of the L3 Declaration").

Natural disasters such as hurricanes, typhoons and other weather events are

increasing in a number of developing countries and smaller economies can affect the economy and social unrest (Baudot). Humanitarian actions that are currently in operations needs to shift from post disaster response to make decisions about how to avoid recurrent extreme loss from natural disasters and to support early action humanitarian response. There is the need for improved understanding of natural

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disaster risk in all its dimensions of exposure, vulnerability and hazard and the strengthen the disaster risk governance.

Sendai Framework for Disaster Risk Reduction (DRR) focuses on the existing challenges in natural disasters to develop components of early warning to prepare before the natural disasters (UNISDR). DRR Resilience is defined as: "The ability of a system, community or society exposed to hazards to resist, absorb, accommodate to and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions" ("Terminology -_{UNISDR"). Some countries are committed to}

strengthening Early Warning Systems (EWS) based on the DRR framework in order to reduce the risks of natural disasters. The IFRC is addressing these natural

disasters to better prepare with good forecasting model, develop better

communication for actions and investment in disaster preparedness at all levels

-community, local and national to address disaster risk reduction as well as the necessity to achieve the Sustainable Development Goals (SDG) (Resilience: Saving

Lives Today,).

3.2 _{Early Warning Early Action}

The International Federation of Red Cross and Red Crescent Societies (IFRC) has built numerous initiatives and invested in early action to prepare the communities for the before the onset of natural disasters(IFRC). Early action activities are implemented in a variety of sectors to rapidly and effectively increase the people, money and materials, depending on the projected scenarios, the livelihoods zone, and the context of disaster.

It is a paradigm shift for IFRC to invest in EWS in preparedness and early response rather than a traditional approach to focus on post-disaster response and long-term preventative measures. IFRC Climate Center has a wide range of solutions such as computer models and satellite images and leverages expertise from national

meteorological offices and other government agencies, local field reports to provide early warning for the communities. The objectives for early warning and early

action are to leverage the scientific information to appropriately make decisions and

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develop solutions that will address the four priorities from DRR framework

-Understanding the disaster risk, strengthening the governance, investing in disaster risk reduction for enhancing preparedness.

Humanitarian needs for natural disasters require good prediction models to be developed by the scientists and organization. The humanitarian organization needs to be nimble in responding to highly complex information associated with the context of natural disaster response. The early warning and early action system need to have decision making and transparency mechanism in place to enable the support required necessary for wider application in facing the impacts of frequent natural disasters.

IFRC needs a better protocol, flexible technology solution, novel knowledge sharing and management and effective use of communication to address the following questions.

" Whether the level of preparedness and planning could accurately predict the

path and occurrence of natural disasters in order to address activities before the natural disasters?

* Are there better methods and technologies can solve complex humanitarian financing to bring aid prior to the natural disasters?

Early Action and Early need to leverage scientific knowledge and technology to facilitate ongoing learning and measurable improvements to address preparedness for humanitarian action before the natural disaster hits the exposed population. The implementation still requires coordination and will require depending on several aspects, ranging from availability of risk information and potential stakeholders' participation in addressing the humanitarian needs. In the next session, I will look at Forecast-based Financing (FbF) interventions method developed by IFRC to the achieve the targets agreed in the Sendai Framework on DRR and answer the

questions whether FbF can potentially transform the current humanitarian system.

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3.3 _{Forecast-Based Financing}

"Forecast-based Financing (FbF) is an approch that uses climate and weather forecasts to trigger timely humanitarian action, before a hazard hits the exposed population (Coughlan De Perez et al.)." FbF system act on early warning threshold, which are different for each classification natural disasters and the accuracy of prediction is important for preventive actions ('Forecast -Based Financing '). FbF

system would require to analyze the risks based on the forecast, communicate information to affected areas effectively, trigger response for appropriate actions, disburses required funding when threshold forecasts are reached, and execute standard operating procedures to mandate to act when these threshold forecasts are issued ('Forecast -Based Financing '.

Scenarios are * Selection of Such as: & Define the This includes: 9 Meteorological designed to national and * Awareness _{threshold for a} * Responsibilities. services. analyse the risk, international raising for specific hazard. * Which forecast * Local

including historical forecasts. hygiene or safe * Identify the cntical whvernments

impact data and ygd g water denhayahteritic will trigger which authorities.

level of Taking into drinking water. ciaracteristics, action. vulnerabilty. csideration * Strengthening analysing

vulner-the probability, of houses. ability and the a Where to act. * National systems

intensity and historical Impact * What funds are to tomanage lead time to the in the area of be made available.

occurrence of intervention. _e_{Run a simulation} an event. * Consider institutio- _{of the SOP.}

nal capacity to act. _eRed Cross/ Red Crescent Societies.

Figure 3 Forecast-Based Financing -An innovative approach

Figure 3 ("DRK Manual

I

_{Manual") illustrates the innovative approach on how the}

humanitarian funding based on forecast information can address the challenges when financing option is only available after the natural disaster strikes. "The FbF has three components triggers, selection of actions and financing mechanism that can be summarized to one method called Early Action Protocols (EAP) ("DRK Manual

I

Manual")."

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3.4 _{Analysis of Forecast-Based Financing System}

EAP is social-technical system includes the community of donors, scientists,

humanitarian actors and local authorities who are responsible for completing their delegated functions before the natural disaster and when the trigger is reached the threshold. An integrated system where all the participating stakeholders whose roles and responsibilities are defined to take part in coordinated dialogue process for technical and financial coordination. The alliance requires FbF mechanism to be adaptive working at national and local levels of the community and accuracy to the prediction disasters where the loss-avoiding action is possible.

There is not the much humanitarian organization has a mechanism in place to act before natural disasters. The criteria to design FbF intervention to develop strong analysis model to predict the disasters and to generate information for building capacity and measure impact.

Forecast-Based Intervention Feasibility 2K

Anasibiy kAssessment Forecasts Capabilities Government Support Organization Capabilities

lAnalysis/Studyl- '- -

'-Outputs for

Design of FbF FbF feasibility Scientific Criteria Adaptation strategies Maturity levels interventi

ons (High, Medium, Low) (Seasonal, Short term) (DRR, Climate Change) (DRR interventions)

Figure 4: Criteria _{for identification and design of Forecast-based Financing interventions}

Before the FbF intervention can be implemented for country and region, a feasibility study is required to understand risk assessments for the feasibility of FbF, analyze the current system reliability of a forecast, review government adaptation strategies of DRR and other intervention programs in the respective region or country and explore the capabilities for FbF supporting organization.

FbF interventions require strong evidence-based information system and robust

coordinated process in place to ensure the stakeholders participate and take actions throughout the process. In order to encourage the stakeholder participation in technical and financial coordination, IFRC and Climate Centre developed

methodological guidelines based on the lesson learned from Pilot countries Peru,

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Togo and Uganda. The pilot program objective is to manage and increase confidence in FbF.

* _{Impact research on forecast-based actions}

0 Comprehensive risk assessments to select danger levels and actions

0 Cost-benefit analysis of actions

* _{Forecast verification analysis to allow high-cost actions} * Test of prototype EAPs and actions

In the context of developing the robust EWS, the impact research will aid in defining the danger levels that can be used during the risk assessments and help prioritize early actions. Cost benefits compare the cost of actions before and after the disaster to provide justification for FbF. The availability of risk information and engagement of stakeholders are required for monitoring the actions, dissemination of funds, and responding to take actions.

The FbF system the uses the climate and weather forecast to enable timely response for disbursement of funds and implement preventive actions. Classification of Natural disasters (EM-DAT) has differing rates of onset and impacts that require different types of warnings, lead times for mitigation and preventative actions. Climatologist and meteorologists deal with large and complex systems involving more variables that can be handled analytically, and predictions are not accurate enough to take action might cast doubt on the prediction. There are a number of factors need to be analyzed and actions are taken for FbF to be successful.

A collaborative research study by the University of Reading (FORECAST- BASED

ACTION) covers in details the aspects of setting the probability threshold in EAP,

deciding which magnitude to set the appropriate level of disaster to trigger in EAP, necessary preparation steps for FbF actions. Designing the preparedness actions will come together on a response plan ince necessary steps are formulated. In the final step is developing cost for the actions for preparedness or preventative actions.

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Cost of preparedness or preventative actions is much lesser than the cost of

responding to the natural disaster and rebuilding infrastructure cost. This is a new type of financing where the funds will be available for disbursement only when a forecast trigger has been reached, at which point the appropriate amount of money will be released to carry out the risk-reducing action based on that forecast.

The necessary steps for FbF action will be worthwhile when acted upon and disaster materialized. However, when the forecast predictions are not accurate and then preparedness actions will go in vain. These actions will onset bad publicity on the decision makers including the humanitarian actors. So, it is important to get participating stakeholders to agree on the proposed actions that were calculated based on the probability and magnitude during the EAP.

The table adapted from Suarez and Tall (2010) depicting the possible scenarios for forecast-based actions and benefit of funding for early action based on the trigger will outweigh the cost of acting in vain (Coughlan De Perez et al.).

Does the extreme event materialize? Disaster _{No Disaster} "Worthy Action" _{"Act in Vain"}

Action (Dedde to act, then event (Decide to act, then event doesnt

materializes and losses are avoided) _{happen - perceived as wasteful)}

"Fail to Act" _{"Worthy Inaction"} Inaction _{(Dedde not to act then event} _{(Dedde not to act,}

occurs leading to avoidable losses) _{then event doesnt happen)}

Figure 5: Illustration of possible outcomes offorecast-based action

In my analysis, I found that the three components of FbF for preparedness or preventative actions requires following the necessary steps. The first component is to identify the different classification of natural disaster and forecast probability and magnitude for a trigger for action. The second component is to ensure that actions taken by the decision-makers and stakeholders would be appropriate based on the trigger. Finally, the third component is to have a mechanism for disbursement of the

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required funds in order to carry out the appropriate actions when the forecast is triggered.

I also learned that FbF in operational context on what challenges are encountered in

linking actions with forecasts and coordination with stakeholders. The first

challenge involves in the complexity of the model that calculates the probability of various natural disasters. For different classification of natural disasters, there are many different with features, functions and variables that need to be translated into a probability of impact. The second challenge is with the selection of an action for developing risk assessment and cost-benefit analysis to formulate necessary actions. To collate the data required to perform the necessary validation for a given

probability and magnitude of forecast and defining the roles and responsibilities of the stakeholders. There are also institutions and political barriers to using forecast information when the given consequences of acting in vain. Lastly, developing the flexible funding sources for forecast-based early action and mechanism by which funding is released based on the agreement tied to the trigger and the action performed by humanitarian actors.

In the next session, I will explore the FbF Stakeholder to understand their roles and responsibilities for interventions.

3.5 Forecast-Based Financing Stakeholders

To better understand and diagnose the mechanics of FbF system and its operations, it is important to understand interactions of identified stakeholders within the network and the roles of government and other organizations. Primarily, it is

imperative to perform stakeholder assessment, which includes identifying the needs of stakeholders, stakeholders' functions, areas of intervention within the network, and the reasons for stakeholders' interactions within FbF. The critical relationships and value flow within the network will provide robust frameworks for better designing the future Forecast-based solutions.

FbF three components triggers, selection of actions and financing mechanism

requires interactions with stakeholders: Climate Centre, IFRC, Governmental

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Organizations, Other NGOs and UN Stakeholders for sharing information, getting approvals or agreements and engaging humanitarian workers. The stakeholders identified are working with objectives to prepare and respond and take the necessary timely implementation of actions, while maintaining transparency and accountability with donors and communities.

The Climate Centre works with IFRC and other humanitarian agencies to reduce the impacts of natural disaster events on vulnerable people who are confronted with challenges living in along coastlines or areas vulnerable to natural disasters. IFRC works with the key stakeholders who have sufficient power to compel influence and willing to put their goods and services for responding towards the objectives of DRR.

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government is influential to leverage military for a rescue effort as well as provide useful equipment required for the relief effort. Local government can employ local community-based organizations who can provide intelligence and background the potential disaster-prone areas. Some community-based organizations already set up operations, and coordinate with local groups, partners in terms of providing assistance and maintaining good communication with the local groups.

The national disaster management agency plays important role respond to natural disasters and they can determine what best ways to coordinate, distribute and monitor all the different organizations participating in humanitarian actions which must meet agreed upon standards.

Other NGOs have considerable experience in providing technical knowledge on approaches to disaster risk reduction, methods to communicate and useful online resources and materials. UN organizations representative can provide information that can be used for activities such as the development of a background document, humanitarian diplomacy, and communications materials.

The key stakeholders, Local Government, Disaster Management Agency, Local Community Partners, Other NGOs and UN Organization are essential for effective action within the FbF systems. The focal point to reach an agreement between the stakeholders based on the interpretation of probability and magnitude of the prediction requires a tremendous amount of resources and time. FbF mechanism is structured to organize the critical stakeholders and establish collaboration for the anticipatory actions and invest in additional aspects such as human capacity, technological and scientific capacity, infrastructure, communications and

information management, and equipment. Finally, additional structure is required for governance to timely and adequate disburse for funding before the event of natural disasters.

This decision-making process involves a complex interaction between stakeholders covering government, scientists and humanitarian workers. The combined model analysis is complex; requires multiple statistical variabilities to formulate Disaster

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Risk Index (DRI) and data analysis using the climate and weather data to develop the probability and magnitude is not robust. The current process emphasis

involving multiple stakeholders to perform additional qualitative analysis to make decisions. There is a need for comprehensive information management systems at a national level that can be used for communication between stakeholders and

performing aggregated risk assessments. In addition, information and data collected on vulnerabilities require transparency to avoid institution and political barriers and avoid using uncertain information. Finally, FbF is currently deployed and improved iteratively based on evidence of the effectiveness of early humanitarian actions. There is a need for better solutions that can improve traceability and enforce trust in the mechanics of Forecast-based Financing.

4. Blockchain Technology

Blockchain original inception was part of the digital currency Bitcoin built with capabilities to provide with identity, perform record keeping. Distributed Ledger Technology (DLT) has shared transaction database, with the ability to update the ledger with consensus and record the ledger with timestamped with unique cryptographic signature and in tamper-proof auditable history. The blockchain is one of the type of DLT with one additional feature to sequential updating the database records in a chained cryptographic hash-linked blow. The blockchain is now finding a wide range of applications in finance, property, contracts and identity. Use cases in payment services -_{the movement of currencies, supply chain tracking}

-goods and secure data are designed in a way that makes the transaction immutable and visible by other participants in the network. In this chapter, I will cover how the blockchain technology works, discuss seven design principles and underline the implementation challenges.

4.1 _{Blockchain Process flow}

Blockchain where the blocks are added to the chain, which contains transaction records securely using cryptography. Blockchain provides a secure way to establish a trust for movement of money, assets and information could revolutionize the way

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business, government, organizations, and individuals work together. Blockchain application is decentralized and verification is done via consensus of multiple users in contrast to the majority of transactions that are verified and stored in a

centralized organization.

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participants updating their own blocks will be placed

Blockchain transactions are recorded and shared with other computers in the network. These transactions are recorded with a

timestamp and combined with other transactions into a block. The updated block will hold all the transactions in sequential records with no duplicate entries. The completed block is sent to the network where the block is appended to the chain. At the same time other

in right order to the chain organized by timestamp. The hash function takes the information in each block and creates the hash which is cryptographic security makes the link between the block virtually unbreakable. An important step is to take hash from the previous block to create a new hash and this of hash function process continues throughout the chain. This feature will deter any attempt to alter previously created block since the hash that is encoded in the next block won't match anymore and the mismatch will continue through the subsequent block denoting an alternation in the chain. All the participants within the network holding the copy of entire blockchain will be able to detect the tampering. This is feature ensure to create a trust of the records stored in the blockchain.

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Blockchain can also help to remove bottlenecks in the market where multiple parties are involved as intermediaries. Blockchain can bring in efficiencies to the systems can help to avoid errors, delays, added costs and unnecessary risks. The blockchain potential is real and has many applications to real word transactions; however, the technology is still in the nascent state before blockchain can be wildly adopted. The blockchain is newer technology that has just begun and will continue to evolve. There are valuable use cases that are identified for using the distributed ledgers to advance into the new decentralized business model and this will require a transformation of many roles within the ecosystems.

4.1.1 Digital Identification

Digital Identification (ID) ensure secure and appropriate access to sensitive data to the approved users. One of an important use case that blockchain is exploited for digitally issued identification. Digital ID using blockchain can provide secure and protect sensitive information and also provide the ability to verify and connect members within the community to be able to exchange intrinsic values.

Current Digital ID has become ubiquitous and has many uses such as to access to bank accounts, purchase products on the website and access social media using computers and smartphones. Many of these Digital ID is not linked directly to government issued identity such as driver license, a passport which makes

authenticity more challenging than physical identity. Some of the existing digital ID management systems such as dual-factor verification provides features reset a forgotten password and authenticating users with second factor identity. Companies with centralized database when it exposed to security breach will lose confidence with the customers and end up losing profits. Current digital ID has challenges with security, privacy and convenience with the limitation of using centralized database and inconsistent methods signup.

Blockchain that is decentralized can solve the existing digital ID. One of the objectives is to make use of government issued ID and improve the delivery of services in the public and private sectors. The hash function will accept the new block using the previous block to form a chain that makes the record impossible to

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tamper. The existence of the blocks will be transparent to the whole world, and others cannot claim once the identity established in the blockchain network. The privacy can be set to and only visible to authorized transaction recipients.

4.2 _{Blockchain Design Principles}

Design principles are sets of guidelines, and considerations serve as a starting point for the creation of new designs to solve problems. Design principles help teams and organizations in the decision-making process and touch various disciplines,

including behavioral science, sociology, physics, and computer engineering. The next generation of blockchain that designed is around well understood principles, advancement of computing power, and stimulated by the cheaper resources feeding the digital economy (Tapscott and Tapscott). Seven design principles from the "Blockchain Revolution" explains the virtues of blockchain technologies. In this chapter, I will summarize seven design principles from the book from what I have assimilated and in the following chapter I will continue to discuss how these principles can be prescriptive to designing for humanitarian actions.

4.2.1 Network Integrity

This is the most important design principle where network integrity is enabled with no single point of trust and no single point of failure. To understand network

integrity in the blockchain, one needs to recognize the double spend problem. Digital currency cannot exist in multiple places, needed a digital ledger to hold transactions. In double spending problem happen when the system cannot resolve who is the actual owner of digital currency and risk and trust in the system. It is important that integrity of the system must be determined every step when dealing with transactions that involve digital currencies. One of the reasons this challenge happens due to the nature of digital systems where records, files and data can hold multiple copies and stored in multiple places. However, when dealing transactions involving digital currency, the technical solution must ensure money leave from one system to another system in order to complete transactions. Conventionally, this solution is provided when online payments and the transactions are cleared in the centralized intermediary system. The centralized system acts as a ledger to

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facilitate these transactions and is a single point of trust and failure. The

breakthrough in the blockchain technology when there are no integration points or central authority required to verify these transactions. This is achieved by

leveraging the two concepts distributed peer-to-peer network and consensus mechanism. The blockchain is able to achieve network integrity in the system with no single point of failure using this design concept.

4.2.2 Distributed Power

The advantage of centralized power lies in the coordination of efforts by the leader and typically follows a hierarchical structure. Centralized power resides on the actor who has power authority to maintain or cut off from the system. Centralized decision-making limits the ability to respond to highly complex information

associated with local tasks. Distributed power can perform complex tasks without any intermediaries in the network where no centralized point. The incentive for distributed power comes from mass collaboration where the power shifts towards members in the system. The design principle in the blockchain offers the ability to be adaptive where members have control over the data and level of participation. 4.2.3 Value as Incentive

When the participants are acting on their own self-interest in the network, they have the freedom and power to choose the level of participation. There should value as an incentive to increase the level of participation. Governance can play a role in identity monitoring for the need to increase the number of unique users. In the distributed power where there are no centralized control or oversight within the network can be exposed to Sybil attacks (Tapscott and Tapscott). The reputation of the distributed peer-to-peer network will lose its integrity when forged with

multiple identities. Value as incentive design principle requires an arrangement in the system to create a structure that aligns and maintains reward structure for all different stakeholders who are participating in the network. This structure aids in keeping the integrity of the peer-to-peer network and ensures participants actions to identify themselves without the governance as well as benefit the system thereby increasing the stakeholder's reputation.

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4.2.4 Security

Blockchain technology uses public key encryption infrastructure (PKI) - public and private key. All participants in the network must use encryption infrastructure to send and receive transactions. The public key is known to all participants within the network and the private key is only known to the recipient. The use of a private key is to decrypt the encrypted message to a readable format. It is impossible to reverse engineer a public key to a private one where the safety measures are embedded with no single point of failure. This secured design principle can make transactions to be authentic and nonrepudiation.

4.2.5 Privacy

There is friction between privacy and identity layers. In the traditional approach organization adds more layers of protection to achieving greater privacy. The assumption was that data anonymization could protect privacy started to crumble when data scientist and security researcher were able to demonstrate

re-identification using re-engineering principles to a certain degree of confidence. The system that can provide users to control own privacy gives the ability and freedom to choose what information to be shared. In the blockchain the option to separate identification and verification layers are separate from the transaction layer. The blockchain offers options to choose the level of privacy in order to maintain a degree of personal anonymity and doesn't store in the centralized database. In contrary to traditional approach blockchain data is not vulnerable to identity centric model which are susceptible to data getting breached. Blockchain offers flexible forms can help users to be selective and control their own data privacy.

4.2.6 Rights Preserved

Blockchain ensure to preserve the rights by confirming the rights registered that is cryptographically signed and tamper-proof. A special purpose code can execute complex instructions to enforce the contractual obligation involving multiple

parties. The design principle of rights preserved by guaranteeing the transactions is immutable and irrevocable to confirm the rights in any type of trades such as real property and intellectual property that is stored in digital contracts. Blockchain

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solution can be developed for digital rights management with the ability to trace the right owners and improved in copyright ownership.

4.2.7 Inclusion

The key construct of blockchain distributed ledger, security and network integrity provides a great window of opportunity and lower the barriers for unbanked individuals to participate in formal financial systems. The blockchain can provide powerful remittance service in addition to providing digital identity thereby

reducing frauds and mistakes in the transactions. The design principle for inclusion is multiple dimensions to the problems that bring speed and transparency to make solutions.

4.3 Blockchain Classifications

The key categories to classify the blockchain is established based on which who have access to manage consensus within the network. The governance structure determines the authorization and the control policy management functions. This structure provides permission for which users have read and write access. In addition, there are rules to manage the users, system and node permission. The consensus agreement defines the set of rules where transactions are independently updated by the nodes in the distribution systems. Based on the user permission to read, write and consensus agreement the classification are permissionless and permissioned blockchains

1. The permissionless Public blockchain is the for anyone can read and write

into blockchain and uses consensus algorithm for any given set of

participants. In public blockchain any peer can join and leave the network at any time. There is no central organization which manages the membership. 2. Permissioned Private blockchain where the read, write and consensus are

managed by the central organization. These selected members can record transactions and can only be read by the members of the organization. The use of private blockchain can be supported centralized database where only the authorized set of readers and writers and the central entity decides and attributes the right to individual peers to participate in the operations.

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3. The permissioned Public blockchain is where anyone can read the blockchain

and write and consensus are managed by the central organization. In this type of blockchain every participant can choose just using the network for information retrieval.

The blockchain Bitcoin and Ethereum are instances of permissionless public

blockchains, which are open and decentralized with ability to participants to join or leave the network. The use permissioned private blockchain will only make senses for the interaction require multiple mutually mistrusting entities to use data. Alternatively, the regular database can be better suited as it provides better

performance in terms of throughput and latency. A permissioned public blockchain system the method of consensus is generally less computationally intensive. In this situation the trust is not extended to all users and the maintainer of the blockchain to designate a limited set of mining nodes.

4.4 _{Blockchain Applications Beyond Digital Currencies}

Digital currencies with the distribution of a global ledger containing all transactions were one of the first application to be using the blockchain technology. There are many potential use cases for blockchain technologies and it is important to

understand that the blockchain technologies network integrity, cryptographic, and recordkeeping can potentially release an important element of creativity and invention for anyone who can understand the design principles and develop applicable use cases in financial and supply chain applications. The traditional business model needs to adapt and to focus on the design principles for value exchange and not as a centralized store value.

Blockchains can be used in digitizing assets other than currencies maintain a public record, such as holding the land title, marriage, or birth records. Blockchains also have strong potential for storing and recording supply chain records in each step of the product lifecycle from the origin to the destination. The other applicable

industries, such as digital notaries, insurance and clinical trials where blockchain does have the power to disrupt. The potential use case of blockchain can also be extended to address the real-world problem in humanitarian, social, politics,

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